How to Take an IRA Required Minimum Distribution in 5 Steps

What is a required minimum distribution*, or “RMD,” you ask? An RMD is the minimum amount that must be withdrawn from an IRA or other retirement account each year. Failure to withdraw the required minimum amount by the annual deadline will cause you to incur a hefty penalty equal to 50% of the amount that should have been withdrawn from the account.  (*Sometimes referred to as a “minimum required distribution,” or “MRD.”)

In general, owners of traditional IRAs must start taking RMDs beginning with the year they turn age 70½. Beneficiaries of both traditional and Roth IRAs are required to begin taking RMDs the year following the year of the account owner’s death, if they do not elect to take a lump sum distribution.

Step 1: Determine the distribution year. The distribution year is the year for which the RMD is being calculated. This may not be the year in which the RMD is actually taken. A person turning age 70½ in 2015 does not have to take their 2015 RMD until April 1 of 2016. But if he does wait until 2016 to take the 2015 RMD, he must still take an RMD for 2016. After the year the IRA owner turns 70½, all subsequent RMDs must be taken by December 31 of each year.

Step 2: Determine the account balance. One must use the account balance as of December 31 of the prior year, adding back any outstanding rollovers and recharacterizations. For example, to determine the RMD for 2015, the account balance as of December 31, 2014, is used.

Step 3: Determine the applicable distribution period, or “ADP.” Most IRA owners will use the Uniform Lifetime Table to determine their ADP. If the IRA owner is married and his spouse is more than 10 years younger than he, the Joint Life Expectancy Table is used. In most situations, account beneficiaries determine their ADP for the year following the year of the account owner’s death using the Single Life Table. The ADP is the divisor used to determine the RMD for the distribution year. Whether determining the ADP for the account owner or an account beneficiary, one must use the age he or she will be at the end of the distribution year. For some RMD types, the ADP is recalculated each year. For other RMD types, the ADP is determined once, in the first distribution year, and reduced by one each year thereafter.

Step 4: Divide the account balance by the ADP. The result is the RMD that must be taken for the distribution year.

Step 5: Withdraw the RMD on time to avoid penalty. If the RMD is for the year in which the account owner turned age 70½, the RMD must be withdrawn by April 1 of the following year. In all other situations the RMD must be withdrawn by December 31 of the distribution year.

It seems very simple. But the rules governing IRA and other retirement account distributions are very complex. Even something as seemingly simple as taking an RMD from an IRA or other retirement account can be done incorrectly, resulting in disastrous tax consequences.

Your situation is unique. Please do not rely on the information contained in this article as it may not apply to your situation. Before making any move with any type of retirement account, consult your CPA or other tax adviser, or contact me. I can help.